Markets were shaken by worries over growth and debt.
There has been a broad retreat from the highs at the start of the month, with bonds, equity and commodity markets all seeing slight falls. While the negotiation over restructuring debts in Dubai continues, this issue appears to have been discounted in the market as a regional issue. Instead the focus was on the creditworthiness of other governments which also accumulated debts during the financial crisis and now face hard choices, with specifically Greece, Ireland and the UK in the news. There was also a succession of worse than expected news on economic recovery, with a revision to Japan’s third quarter GDP figure which slashed the pace of growth. This was countered by more positive news from other economies in the Asia Pacific region, which helped equity markets rally at the end of the week. In currency markets, the US dollar benefited from the good employment figures announced in the previous week and the strength of the dollar contributed to the weakness in commodity prices.
Painful choices on government budgets and credit ratings.
Cutting his own salary by 15% highlighted the toughness of the budget presented by Ireland’s finance minister, Brian Lenihan. With the economy in deflation, prices falling by 6.5%, Ireland has responded by cutting pay and benefits to bring its budget deficit under control. The concern is reflected in the market with the yield on 10-year government bonds at nearly 5%, compared to 3.2% for German bunds. However, the new government in Greece faces an even greater task. A higher level of existing debt will complicate the task and with the downgrade of its bonds to Triple-B, yields are back at levels last seen during the global liquidity crisis at the start of the year. The UK saw gilt yields rise by 14 bps to 3.8%, following a mixed market reception to the Pre-Budget Report, which introduced a few measures to address a record deficit of over 12% of GDP. Yet while the Triple-A rated UK has more leeway to address its debt issues, the scale of its economy also means that that it cannot rely on the global economic recovery to bail it out of deflation, so it is unwilling to tighten fiscal policy aggressively for fear of recession.
As 2009 draws to a close, economic recovery is still patchy.
A drastic revision to Japan’s GDP figures showed that the economy grew just 0.3% in the third quarter, rather than the 1.3% originally estimated. This highlighted the fragile state of Japan’s recovery and underlined the need for the Y7.2 trillion stimulus package announced by the new government. Germany also reported an unforecast decline in industrial production in October. Meanwhile, the US the government hopes to re-direct $200bn from the TARP funds, now that the banking industry has stabilised, to new job stimulus programmes with a view to boosting the economy.
Worries over growth in Asia are increasingly about overheating.
Chinese industrial production in November rose by 19.2% over the year and the annual inflation rate moved into positive territory for the first time since January. Australian unemployment fell to 5.7%, with 31,200 new jobs in October, including 30,800 fulltime positions. This suggests that the pace of interest rate increases is likely to be maintained, if not quickened. While the Bank of Korea moved "near to the door for a timely exit" of loose monetary policy, saying that 2% interest rates were incompatible with the government’s forecast of 5% growth next year.
Indices, Interest rates and Inflation
|
Close - 27 Nov 09 |
1 Week% |
1 Month% |
3 Months% |
YTD |
|
|
FTSE ALL Share |
2,683 |
-1.3 |
-0.4 |
3.9 |
21.4 |
|
FTSE 100 |
5,262 |
-1.1 |
-0.1 |
5.0 |
18.7 |
|
S&P 500 |
1,106 |
0.0 |
0.7 |
6.1 |
22.5 |
|
Nasdaq Composite |
2,190 |
-0.2 |
1.1 |
5.3 |
38.9 |
|
DJ Stoxx (Europe) |
266 |
-1.8 |
-0.1 |
0.6 |
19.5 |
|
Nikkei 225 |
10,108 |
0.9 |
2.4 |
-3.2 |
14.1 |
|
Hang Seng |
21,902 |
-2.7 |
-3.2 |
3.5 |
52.2 |
| Official Rates (%) |
Inflation (%) |
Rate announcement |
|||
|
Current |
Mar-10 Forecast |
Jun-10 |
Current |
Next Date |
|
|
US (Fed Funds) |
0.25 |
0.25 |
0.50 |
-0.2 |
16-Dec |
|
UK (Base rate) |
0.50 |
0.50 |
0.50 |
1.5 |
07-Jan |
|
Euro-zone (Repo Rate) |
1.00 |
1.00 |
1.00 |
-0.1 |
07-Jan |
|
Japan (Call rate) |
0.10 |
0.10 |
0.10 |
-2.5 |
18-Dec |
View the full Global Markets Weekly report (pdf).
Disclaimer Issued by Coutts & Co, which is authorised and regulated by the Financial Services Authority.
The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance should not be taken as a guide to future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.
The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. The information shown is believed to be correct but cannot be guaranteed. Any opinion or forecast constitutes our judgement as at the date of issue and is subject to change without notice. Any Coutts company, or a connected company, its clients and officers may have a position or engage in transactions in any of the securities mentioned.
The analysis in this document has been procured, and may have been acted upon, by Coutts & Co and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law ad without being inconsistent with any applicable regulation, neither Coutts & Co nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such analysis.
Not all products and services offered by the individual Coutts companies are available in all jurisdictions, and some products and services may be available only through particular Coutts companies.
None of the overseas Coutts companies or offices is an Authorised Person subject to the rules and regulations made under the Financial Services and Markets Act 2000 for the protection of investors and depositors, and compensation under the Financial Services Compensation Scheme will not be available in respect of business transacted with them.
